لخّصلي

‏In every business enterprise, various transactions and events take place every day; sales are affected, purchases are made, expenses are met or incurred, payments are received and made, assets are sold and acquired.
‏. These events, arising out of the decisions and actions of managerial, exercise their effects and impact on the operational efficiency and position of the enterprise. Most of these transactions and events have money values or can
‏be measured and expressed in money values.
‏Since they affect the operation and position of the enterprise, they need to be measured, recorded, analyzed, and reported to the managerial, so that the
‏management can evaluate their effect upon the enterprise.
‏. As compared with financial accounting and cost accounting, managerial accounting is a later development. Managerial accounting links management with accounting. All such information that is useful to the management is the
‏subject matter of managerial accounting.
‏Any information required for decision making is the concern of managerial accounting. Managerial accounting, unlike financial accounting, provides information for internal users, though the basic data come from the
‏same accounting system i.e., financial accounting and cost accounting systems.

‏Managerial accounting collects and provides accounting, cost accounting, economic and statistical information to the men at various managerial levels to assist them in the performance of managerial functions and
‏their evaluations.
‏. It is the development and application of various techniques of recording, analysis, interpretation, and presentation, making the financial, costing, and other data active and effective in the performance of managerial functions, viz.,
‏planning, decision-making and control.
‏. It should be noted that managerial accounting makes use of not only accounting techniques but also of statistical and mathematical techniques. Managerial accounting is forward looking and should, therefore, be able to treat economic information and data to make it suitable for use by the management.
‏. Based on the foregoing, we will discuss in this chapter, Route To Management, Evolution of Managerial Accounting, The Concept of Managerial Accounting , Objectives’ of Managerial Accounting , Nature of Managerial Accounting, Scope of Managerial Accounting ,Tools and Techniques of Managerial Accounting ,Difference between Financial Accounting and Cost Accounting ,Difference between Financial Accounting and Managerial Accounting ,Difference between Cost Accounting and Managerial Accounting ,Limitations of Managerial Accounting ,Conflicts in

‏Profit versus Value Maximization Principle and Finally, Role of Managerial Accountant in Decision Making.

‏Route To Management

‏The route or career path to a management position is also very different in the two economic variants of capitalism. In a communitarian company, broadly educated college graduates develop a cumulative multi-function knowledge of the organization before they become managers.

‏. In other words, they become company generalist through a long internship program, rather than functional specialist. Since communitarian managers develop company specific knowledge, they are not particularly
‏mobile or marketable outside the organization.
‏. However, this company specific orientation and the policy of promoting from within the organization increases the manager’s internal mobility. The combination of internal mobility and lifetime employment establishes a bond
‏between the manager and the organization.. From the company perspective, the resulting low labor turnover rates
‏support the relatively heavy expenditures on management training. The individualistic system is quite different. College graduates who have specialized in a particular area of study such as industrial engineering, accounting, or marketing are hired by organizations to work in that particular functional area. After acquiring experience in their specialty, they become managers.

‏Their orientation to a specific business function enhances their mobility in the external labor market, but they are frequently locked into their chosen specialty area. Of course, some managers do break out of their narrow specialty
‏areas to move up the management hierarchy.

‏External mobility is clearly an advantage to the individual in an environment where employees are treated as factors of production or commodities.
من الواضح أن التنقل الخارجي ميزة للفرد في بيئة يتم فيها معاملة الموظفينكعوامل إنتاج أو سلع. Disloyalty to the company is not an insoluble problem for the organization in an individualistic system however, because a functional
‏specialist can be easily replaced with another functional specialist.
‏. Company specific knowledge is less important in a system organized
‏around specialists rather than generalists.

‏Evolution of Managerial Accounting

‏Managerial accounting has its roots in the industrial revolution of the 19th century. During this early period, most firms were tightly controlled by a few owner-managers who borrowed based on personal relationships and their personal assets

‏Since there were no external shareholders and little unsecured debt, there was little need for elaborate financial reports. In contrast, managerial accounting was relatively sophisticated and provided the essential information needed to
‏manage the early large-scale production of textile, steel, and other products.

‏After the turn of the century, financial accounting requirements grow rapidly because of new pressures placed on companies by capital markets,
‏creditors, regulatory bodies, and federal taxation of income.

‏Many firms needed to raise funds from increasingly widespread and detached suppliers of capital. To tap these vast reservoirs of outside capital, firms'
‏managers had to supply audited financial reports. Because outside suppliers of capital relied on audited financial statements, independent accountants had a keen interest in establishing well defined
‏procedures for corporate financial reporting.

‏As a consequence, for many decades, management accountants increasingly focused their efforts on ensuring that financial accounting
‏requirements were met, and financial reports were released on time.
‏ The practice of management accounting stagnated. In the early part of the century, as product line expanded operations became more complex, forward-looking companies saw a renewed need for management-oriented
‏reports that was separate from financial reports.

‏But in most companies, management accounting practices up through themid-1980s were largely indistinguishable from practices that were common
‏prior to World War I

‏In recent years, however, new economic forces have led to many
‏important innovations in management accounting.

‏Concept of Managerial Accounting

‏The managerial accounting team of Anglo-American Council on Productivity defined managerial accounting as:

‏“The presentation of accounting information in such a way as to assist management in the creation of policy and in day-to-day operation of an understanding”

‏American Accounting Association defines managerial accounting as
‏under:

‏The application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plans for reasonable economic objectives and in the making of
‏rational decisions with a view towards these objectives”. J Batty defines:
‏“Managerial accounting is the term used to describe accounting methods, systems and techniques which coupled with special knowledge and ability, assists management in its task of maximizing profits or minimizing losses”

‏Brown and Howard define:
‏“Management accounting is that aspect of accounting which is concerned with the efficient management of a business through the presentation of management of such information as will facilitate efficient and opportune planning and control”Managerial accounting is concerned with accounting information which is useful to management”

‏According to CIMA, London:

‏Managerial accounting is an integral part of management concerned
‏with identifying, presenting, and interpreting information used for:

‏(a) formulating strategy.
‏(b) planning and controlling activities.
‏(c) decision taking.
‏(d) optimizing the use of resources.
‏(e) disclosure to shareholders and others external to the entity. (f) disclosure to employees.
‏(g) safeguarding assets.

‏The above involves participation in management to ensure that there is effective:

‏(1) formulation of plans to meet objectives (strategic planning).
‏(2) formulation of short-term operation plans (budgeting/profit; planning).
‏(3) acquisition and use of finance (financial management) and recording of transaction (financial accounting and cost accounting).

‏(4) communication of financial and operating information.
‏(5) corrective action to bring plans and results into line (financial control). (6) reviewing and reporting on systems and operations (internal audit,
‏management audit).

‏If the meaning of ‘managing’ and ‘accounting’ are understood, the definition of managerial accounting becomes quite clear. The main objective of the management is to manage the company following a managing pattern comprised of formulation of plan, allocation of responsibilities for implementing the plan, organizing procedures to assist in the
‏execution of the plan, and control of the performance.

‏To assist in this process, the accounting system provides to the
‏management the following information viz: (1) data designed to assist in the formulation of a plan covering all business functions,
‏(2) transform the project in quantitative terms with sources available to finance the project costs.
‏(3) devise workable standards of performance matching to the responsibilities and measure the performance and assist in the

‏An analysis of the above definitions enables us to define management accounting as the processing and presenting of accounting, cost accounting and other economic data, both historical and projected, in such a way as would assist in the performance evaluation of managerial functions, viz. planning, decision- making and control

‏Processing and presenting of the data involve the use of techniques of cost accounting, budgetary control, standard costing, break-even analysis,
‏ratio-analysis, funds, and cash flow analysis, etc.

‏Objectives of Managerial Accounting

‏The fundamental objective of managerial accounting is to assist the management in carrying out its duties efficiently so that maximize profits or minimize losses of management.

‏It includes computation of plans and budgets covering all aspects of the
‏business. Example: production, selling, distribution, research, and finance.

‏Managerial accounting systematic allocate responsibilities for implementation of plans and budgets. Its analysis of all transactions, financial and physical, to enable effective comparison to be made between the forecasts and actual performance.

‏The main objectives of managerial accounting are as follows:

‏1. To formulate Planning and policy:
‏Planning involves forecasting on the basis of available information, setting goals; framing polices determining the alternative courses of action and deciding on the program of activities. It facilitates the preparation of statements in the light of past results and gives estimation for the future

‏2. To interpretation of financial documents
‏Management accounting is to present financial information to the management. Financial information must be presented in such a way that it is easily understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc.

‏3. To assist in Decision-making process:
‏Managerial accounting makes decision-making process more scientific with the help of various modern techniques. Information/figure relating to cost, price, profit, and savings for each of the available alternatives are collected and analyzed accordingly which will provide a base for taking sound decisions.

‏4. To help in control:
‏Managerial accounting is a helpful for managerial control.

‏Management accounting tools e.g., standard costing and budgetary control are helpful in controlling performance. Cost control is affected through the use of standard costing and departmental control is made possible through the use of budgets. Performance of each and every individual is controlled with the help of management accounting.

‏5. To provide report:
‏Managerial accounting keeps the management fully informed about the latest position of the concern through reporting. It helps management to take proper and quick decisions. It informs the performance of various departments regularly to the top management.

‏6. To Facilitate Coordination of Operations:
‏Managerial accounting provides tools for overall control and coordination of business operations. Budgets are important means of coordination.

‏Nature of Managerial Accounting

‏The following aspects are considered as the nature of management accounting

‏1) Managerial accounting is a decision-making system:
‏Managerial accounting provides accounting information in such a way as to assist management in the creation of policy and in the day-to-day operations. Though management accountant is not taking any decision but provides data which is helpful to management in decision making. It communicates a great variety of facts in a systematic and meaningful manner.

‏(2) Management accounting is futuristic:
الحقائق بطريقة منهجية وذات مغزى.
‏Management accounting unlike the financial accounting, deals with the future. It helps in planning the future-because decisions are always taken for the future course of action. In the decision-making process management accounting provides selective and fruitful information out of the data collected

‏3) Management accounting is a technique of selective nature:
‏Management accountant takes into account only those data from the financial statement and communicates to the management which is useful for taking decisions.

‏4) Managerial accounting analyses different variables:

‏Managerial accounting helps in analyzing the reasons for variations in profit as compared to the past period. It analyses the effects of different variables on the profits and profitability of the concern.

‏5) Managerial accounting does not set particular formats for information:
‏It provides necessary information to the management in the form which may be more useful to the management in taking various decisions on different aspects of the business.

‏Scope of Managerial Accounting

‏Managerial accounting includes financial accounting and extends to the operation of a system of cost accountancy, budgetary control, and statistical data.

‏While meeting the legal and conventional requirements regarding the presentation of financial statements, (profit and loss account, balance sheet and cash flow statements) it stresses emphasis upon the establishment and operation
‏of internal controls.

‏The scope of managerial accounting, inter alia includes:

‏1. Formation, installation and operation of accounting, cost accounting, tax accounting and information systems. Managerial accountant has to construct and reconstruct these systems to meet the changing needs of management
‏functions.

‏2. The compilation and preservation of vital data for management planning. The accounts and the document files are repository of vast quantities of details about the past progress of the enterprise, without which forecasts of
‏the future is very hazardous for the enterprise.

‏The managerial accountant presents the past data in such a way as to reflect the trends of events to the management. He is supposed to give his assessment of anticipated changes in relevant areas. Such information provides
‏effective assistance in the planning process.

‏At times the management accountant may be called upon to associate with and even supervise the actual planning process along with other members
‏of the management team.

‏4. Providing and installing an effective system of feed-back reports. This would enable the management in its controlling function.

‏By pin-pointing the significant deviations between actual and expected activities, and by adhering to the principles of selectivity and relevance, such reports help in the installation and operation of the system of ‘management by exceptions.

‏The managerial accountant is expected to analyze the deviation by reasons and responsibility and to suggest appropriate corrective measures in
‏deserving cases.

‏5. Analyzing and interpreting accounting and other data to make it understandable and usable to the management. It is only through such analysis and clarification that the management is enabled to place the various data and
‏figures in proper perspective in the performance of its functions.

‏Such analysis assists management in the location of responsibilities and to effect necessary changes in the organizational set up to achieve the objectives of
‏the enterprise in a more efficient manner.

‏6. Assisting management in decision-making by:

‏(a) providing relevant accounting, other data and

‏(b) analyzing the effect of alternative proposals on the profits and position
‏of the enterprise.

‏Management accountant helps the management in a proper understanding and analysis of the problem in hand and presentation of factual information obviously in financial terms.

‏7. Providing methods and techniques for evaluating the performance of the management in the light of the objectives of the enterprises, thus assisting
‏in the implementation of the principle of management by objectives.

‏8. Improving, modifying, and sharpening the effectiveness of co-existing techniques of analysis. The management accountant should always think of increasing the practicability of existing techniques.

‏He should be on the lookout for the development of new techniques as well. Thus, management accounting serves not only as a tool in the hands of management, but also provides for a technique of evaluating the performance
‏of the management itself.

‏It operates as a double-edged sword assisting the management in proper performance of its functions of planning, decision-making and control, and at the same time, enabling the owners and other interested parties to evaluate and
‏appraise the management of the enterprise

‏Tools and Techniques of Managerial Accounting

‏A number of tool and techniques have been used under managerial accounting to help management in achieving the desired goals.

‏For this the managerial accountant normally uses the following tool and
‏techniques

‏(1) Financial Planning:
لهذا يستخدم محاسب الإدارة عادة الأدوات والتقنيات التالية:
‏Financial planning is the process of deciding in advance about the financial activities necessary for the organization to achieve the desired objectives.

‏It includes determining both long term and short-term financial objectives, formulating financial policies and developing the financial
‏procedures etc.

‏Financial policies may relate to the determination of the capital requirement, sources of funds, determination and distribution of income, use of debt and equity capital and the determination of the optimum level of
‏investment in various areas.

‏(2) Financial Statement Analysis:
‏Financial statements are analyzed to make data more meaningful. Comparative statement analysis, common size statement analysis, trend analysis, ratio analysis, cash flow analysis etc. are the major techniques of financial statement analysis used in management accounting.

‏(3) Decision Making:
‏Managerial accounting helps the management through the techniques of marginal costing, differential costing, capital budgeting, cash flow analysis, discounted cash flow etc. to select the best alternative which will maximize the profits of the business.

‏(4) Control Techniques:
‏Management should ensure that the plan formulated by it has been translated into action. Standard costing and budgetary control techniques are useful control techniques used by management.

‏(5) Statistical and Graphical Techniques:

‏Managerial accountant uses various statistical and graphical techniques in order to make the information more meaningful and presentation of the same in such a form so that it may help the management in decision making.

‏The techniques of linear programming, statistical quality control,
‏investment chart, sales and earning chart etc. are of vital use.

‏(6) Reporting:

‏Managerial accountant prepares the necessary reports for providing information to the different levels of management by proper selection of data to

‏be presented, organization of data or selecting the appropriate method of reporting.

‏Relationship of Cost Accounting, Financial Accounting, Managerial Accounting and Financial Managerial

‏Cost Accounting has been developed because of the limitations of Financial Accounting from the outlook of management control and internal
‏reporting.

‏Financial accounting executes the function of exposing a true and fair overall picture of the results or activities carried on by an enterprise during a period (via statement of profit and loss) and its financial position at the end of the year (via balance sheet)

‏Also, on the basis of financial accounting, effective control can be exercised on the property and assets of the enterprise to ensure that they are not
‏misused or misappropriated.

‏To that extent financial accounting helps to assess the overall progress of a concern, its strength, and weaknesses by providing the figures relating to
‏several previous years.

‏Data provided by Cost and Financial Accounting is further used for the management of all processes associated with the efficient acquisition and deployment of short-, medium- and long-term financial resources.

‏Such a process of management is known as Financial Managerial. The objective of Financial Management is to maximize the wealth of shareholders
‏by taking effective Investment, Financing and Dividend decisions.

‏Investment decisions relate to the effective deployment of scarce resources in terms of funds while the Financing decisions are concerned with
‏acquiring optimum finance for attaining financial objectives.

‏The last and very important 'Dividend decision' relates to the determination of the amount and frequency of cash which can be paid out of
‏profits to shareholders.

‏On the other hand, Managerial Accounting refers to managerial processes and technologies that are focused on adding value to organizations by attaining the effective use of resources, in dynamic and competitive contexts.

‏Hence, Managerial Accounting is a distinctive form of resource management which facilitates management's 'decision making' by producing
‏information for managers within an organization.

‏Difference Between Financial Accounting and Cost Accounting

‏Both financial accounting and cost accounting are concerned with systematic recording and presentation of financial data

‏Financial accounting reveals profits and losses of the business as a whole during a particular period, while cost accounting shows, by analysis
‏and localization, the unit costs and profits and losses of different product lines.

‏The main difference between financial accounting and cost accounting
‏are summarised below:

‏1) Financial accounting aims at safeguarding the interests of the business and its proprietors and others connected with it. This is done by providing suitable information to various parties, such as shareholders or partners, present or prospective creditors etc. Cost accounting on the other hand, renders information for the guidance of the management for proper
‏planning, operation, control, and decision making.

‏2) Financial accounts are kept in such a way as to meet the requirements of the Companies Act, Income-tax Act and other statues. On the other hand, cost accounts are generally kept voluntarily to meet the requirements of management. But now the Companies Act has made it
‏obligatory to keep cost records in some manufacturing industries.
1

‏3) Financial accounting emphasizes the measurement of profitability, while cost accounting aims at ascertainment of costs and accumulates data for

‏this very purpose.

‏(4) Financial accounts disclose the net profit and loss of the business as a whole, whereas cost accounts disclose profit or loss of each product, job, or service. This enables the management to eliminate less profitable product lines
‏and maximize the profits by concentrating on more profitable ones.

‏5) Financial accounting provides operating results and financial position usually gives information through cost reports to the management as
‏and when desired

‏6) Financial accounts deal mainly with actual facts and figures, but
‏cost accounts deal partly with facts and figures and partly with estimates.

‏7) In case of financial accounts stress is on the ascertainment and exhibition of profits earned or losses incurred in the business. In cost accounts
‏the emphasis is more on aspects of planning and control.

‏(8) Financial accounting is concerned with historical records, while cost accounting is concerned with historical cost but also with pre- determined cost.

‏9) Financial accounts are concerned with external transactions i.e., transactions between the business concern on one side and third parties on the other. These transactions form the basis for payment or receipt of cash. While cost accounts are concerned with internal transactions which do not form the
‏basis of payment or receipt of cash.

‏10) The costs are reported in aggregate in financial accounts, but
‏costs are broken into unit basis in cost accounts.

‏(11) Financial accounts do not provide information on the relative efficiencies of various workers, plants, and machinery, while cost accounts provide valuable information on the relative efficiencies of various plants and
‏machinery

‏12) Financial reports (profit and loss account and balance sheet) are prepared periodically – quarterly, half yearly or annual basis. But cost
‏reporting is a continuous process and may be daily, weekly, monthly etc.

‏Difference Between Financial Accounting and Managerial Accounting

‏Financial accounting and managerial accounting both appear to be similar in as much as both study the impact of business transactions and events
‏of the enterprise and report and interpret the results thereof.

‏Both provide information for internal as well as external use. But managerial accounting, although having its roots in financial accounting
‏differs from the latter in the following respects.

‏1. Financial accounting deals with the business transactions and events for the enterprise as a whole. Managerial accounting, in addition to the study of events in relation to the enterprise as a whole take’s organization in its various units and segments and attempts to trace the impact and effect of the business transactions and events through its various divisions and sub-divisions. Thus, while the financial statement - profit and loss account, balance sheet and cash flow statements reveal the overall performance and position of the enterprise. Managerial accounting reports emphasize on the details of operational costs, inventories, products, process, and jobs. It traces the effect and impact of the business transactions and events on costs, inventories, processes, jobs, and
‏products.

‏2. Financial accounting is attached more with reporting the results and position of the business to persons and authorities other than management - Government, creditors, investors, owners, etc. At times, financial accounting follows window-dressing tactics in order to project a better than actual image of the enterprise. Managerial accounting is concerned more with generating information for the use of internal management and hence the information reflects the real or really expected position.

‏3. Financial accounting is necessarily historical. It records and analyses business events long after they have taken place. Managerial accounting analyses the events as they take place and also anticipates such events for the future. Thus, it uses data which generally has relevance to the future.

‏4. Since financial accounting data is historical in nature, it is more precise than the managerial accounting data, which generally reflects the expected future, and hence could only be an estimation. This provides the
‏necessary rapidity to managerial accounting information.

‏5. The periodicity in reporting financial accounts is much wider than in case of managerial accounting. In financial accounting, generally, results are reported on year-to-year basis. In managerial accounting, weekly,
‏fortnightly, and even monthly reporting is used.

‏6. Financial accounting has to be governed by the “generally accepted principles”. This is so because, it has to cater for the informational needs of the outsiders. It has to stick to the generally accepted methods of presentation of such information. Regarding the contents and form of information, financial accounting has to abide by the legal provisions also.
‏Managerial accounting has not to worry about such legal and/or conventional constraints and the “generally accepted principles”. It is free to formulate its own rules, procedures, and forms, because the information it generates is solely for internal consumption.
‏In managerial accounting fixed assets may be stated at appraisal values, overhead costs may be omitted from inventories or revenues may be recorded before realization. Generally accepted principles of financial accounting do not permit such accounts. What is important in managerial accounting is the usefulness of the information for management functions rather than its general acceptability. The form and content of managerial accounting information differs according to the needs and purpose.

‏7. Financial accounting is a must in case of joint stock companies to meet the statutory provisions of company law and tax laws. Even in case of sole proprietorship and partnership firms financial accounting becomes a necessity for tax purposes. Managerial accounting, on the other hand, is entirely optional and its forms and contents depend upon the outlook of the management

‏8. Financial statements prepared under financial accounting consists of monetary information only. Managerial accounting statements in addition to monetary information also consist non-monetary information, viz., quantities of materials consumed, number of workers, quantities produced and sold and
‏so on.

‏9. Financial statements are required to be published and audited by statutory auditors. Managerial accounting statements are for internal use and
‏thus neither published nor audited

‏Difference Between Cost Accounting and Managerial Accounting

‏Cost accounting and managerial accounting both are internal to the
‏organization.

‏Both have the same objectives of assisting management in its functions of planning, decision-making, controlling and techniques like budgetary control, standard costing and marginal costing owe their existence to cost accounting
‏and have slipped into the kitbag of the managerial accountant.

‏There is a good deal of overlapping in their functions.

‏However, the two systems can be differentiated on the following
‏grounds:

‏1. Cost accounting is concerned more with the ascertainment, allocation, distribution, and accounting aspects of costs. Managerial
‏accounting is concerned more with impact and effect aspect of costs.

‏2. Cost accounting data generally serves as a base to which the tools and techniques of managerial accounting can be applied to make it more purposeful and management oriented. Whereas the managerial accounting
‏data is derived both, from the cost accounts and financial accounts.

‏3. The managerial accountant places the data in a wider perspective than the cost accountant. This accounts for a greater degree of relevance and objectivity in managerial accounting than in cost accounting. It is the managerial accountant who is supposed to have a clear idea regarding the items and types of costs required to analyses and decide specific business problems and the effect of such costs on alternate solutions. A cost accountant is definitely

‏helpful in collecting such costing data for the managerial accountant.

‏4. In the organizational set-up, managerial accountant generally is placed
‏at a higher level of hierarchy than the cost accountant.

‏5. The approach of the cost accountant is much narrower than that of a managerial accountant, who may have to use certain economic and statistical data along with the costing data to enable the management to be more accurate
‏the precise in its functions of planning, decision-making and control.

‏6. Managerial accounting, in addition to the tools and techniques, like variable costing, break-even analysis, standard costing, etc., available to cost accounting, also makes use of other techniques like cash flow, ratio analysis,
‏etc., which are not within the scope of cost accounting.

‏7. Managerial accounting includes both financial accounting as well as cost accounting. It also embraces tax planning and tax accounting. Cost accounting does not include financial accounting and has nothing to do with
‏tax accounting.

‏8. Managerial accounting is concerned equally with short-range and long-range planning and uses highly sophisticated techniques like sensitivity analysis, probability structures, etc., in the planning and forecasting prices. Cost accounting is more concerned with short-term planning. Evaluation of capital investment projects is the specialty of managerial accountant.

‏9. Managerial accounting is concerned, both, with assisting management in its functions, as well as evaluating the performance of the management as an institution. Cost accounting is concerned merely with assisting in management functions and does not provide for the evaluation of the performance of management.

‏10. Cost accounting is mostly historical in its approach, and it projects the past. Management accounting is futuristic in its approach. Managerial
‏accounting is more predictive in nature than cost accounting.

‏11. Cost accounting system can be installed without managerial accounting. While management accounting cannot be installed without a
‏proper cost accounting system.

‏Limitations of Managerial Accounting

‏The management accountant has the responsibility of producing and providing dependable accounting and other relevant data for the use of management.

‏The data provided if it has to be really effective in the management process, must be

‏(1) relevant and precise,
‏(2) consistent and comparable,
‏(3) presented in an appropriate and understandable form,
‏(4) provided at appropriate time intervals, and
‏(5) provided to meet the needs of various levels of management.

‏The management accountant is expected to keep in mind the above points while producing his product. However, the information and reports presented by management accountant still suffers from the following
‏limitations:

‏1) Different meaning of the same term:

‏In accounting different terms carry different meanings under different set of circumstances and conditions. Such meanings and figures may superficially resemble one another and a person who is not, familiar with them may easily become confused or frustrated. The most common source of confusion is the word ‘cost’

‏There are historical costs, full costs, direct costs, variable costs, standard costs, original costs, residual costs, net costs, differential costs, opportunity costs, estimated cost and incremental costs. Some of these terms are synonymous, others are not exactly synonymous through resembling each other, still others, although not synonymous at all, may be used as if they were synonymous.

‏In order to avoid such confusion and misunderstanding, the managerial accountant should in approaching a specific problem, define, as carefully and clearly as possible, the meaning in which such words are being used. He should
‏as far as possible be consistent in prescribing the meanings to such terms.

‏(2) Approximations

‏Management accounting data cannot be completely accurate in all respects. A good deal of approximation is involved in the compilation and preparation of such data.

‏The smaller the time gap between the happening and reporting of an event, the greater will be the approximation. In addition, in the working out of the estimates and future costs,
‏approximation has to be resorted to. Even in case of historical data, the cost and time required for accuracy may be prohibitive and compel the management accountant to do some approximations. Therefore, while using the information provided by the management accountant, the management must be aware of the degree of approximation. The management accountant should follow a consistent practice in matters of approximations.

‏3) Incompleteness of the data:

‏Management accountant can provide only the quantitative data as far as available to the management. Business problems and their decisions often require additional quantitative as well as qualitative data which may be outside the purview of the management accountant.

‏For example, the management accounting data will not disclose the extent to which the quality and utility of a product is affected by the changes in
‏materials or methods of production.

‏The management should guard itself against the belief that problems could be completely solved by numerical analysis. The managerial accountant should point out as far as possible, the qualitative factors relevant for decision-
‏making in each case.

‏(4) Importance of proper management action:

‏A management accountant may provide information and figures in most appropriate form to the management. But figures themselves are nothing more than marks on pieces of paper, and by themselves they accomplish nothing.

‏Anything that the business accomplishes is the result of action of the people. Figures can only assist people in the organization in various ways. It is the management and the people in the organization who are to use the figure
‏by understanding their language and act accordingly.

‏The same set of figures, if not acted upon by the management, becomes
‏useless or if misunderstood by the management, may lead to unwise actions.

‏Conflicts in Profit Versus Value Maximization Principle

‏A process that businesses undergo to determine the best output and price levels in order to maximize its income. The business will usually adjust influential factors such as production costs, sale prices, and output levels as a way of reaching its profit goal.

‏There are two main profit maximization methods used, and they are Marginal Cost-Marginal Revenue Method and Total Cost-Total Revenue Method. In economics, profit maximization is the short run or long run process by which a firm determines the price and output level that returns the greatest
‏profit.

‏The wealth maximization is now redefined as value maximization, since the goal of management is to maximize the present wealth of the owners, i.e., equity shareholders of a company. A company’s equity shares are actively traded in the stock exchanges, the wealth of the equity shareholders is represented in market value of the equity
‏shares. The prime goal of the organization is to maximize the market value of equity shares of the company. The shareholder’s wealth is maximized only
‏when the market value of the shares is maximized.

‏The modern approach of management accounting focuses on wealth maximization rather than profit maximization. This gives a longer-term
‏horizon for assessment, making way for sustainable performance by businesses. A narrow-minded person or business is mostly concerned about short
‏term benefits. A short-term horizon can fulfil objective of earning profit but may not help in creating wealth. It is because wealth creation needs a longer-term horizon Therefore, management emphasizes on wealth maximization rather than profit maximization. For a business, it is not necessary that profit should be the only objective; it may concentrate on various other aspects like increasing sales, capturing more market share etc., which will take care of profitability. So, we can say that profit maximization is a subset of wealth and being a subset, it will facilitate wealth creation.

‏Giving priority to value creation, managers have now shifted from traditional approach to modern approach that focuses on wealth maximization. This leads to better and true evaluation of business. For e.g., under wealth maximization, more importance is given to cash flows rather than profitability. As it is said that profit is a relative term, it can be a figure in some currency, it can be in percentage etc. For e.g., a profit of ` 2 CU cannot be judged as good or bad for a business, till it is compared with investment, sales etc. Similarly, duration of earning the profit is also important i.e., whether it is earned in short term or long term. In wealth maximization, major emphasizes is on cash flows rather than profit. So, to evaluate various alternatives for decision making cash flows are taken under consideration. For e.g., to measure the worth of a project, criteria like: “present value of its cash inflow – present value of cash outflows” (net present value) is taken. This approach considers cash flows rather than profits into consideration and
‏also use discounting technique to find out worth of a project. Thus, maximization of wealth approach believes that money has time
‏value. At times, wealth maximization may create conflict, known as agency problem. This describes conflict between the owners and managers of firm. As, managers are the agents appointed by owners, a strategic investor or the owner of the firm would be majorly concerned about the longer-term performance of the business that can lead to maximization of shareholder’s wealth

‏. Whereas a manager might focus on taking such decisions that can bring quick result, so that he/she can get credit for good performance. However, in course of fulfilling the same, a manager might opt for risky decisions which can Hence, a manager should align his/her objective to broad objective of organization and achieve a trade-off between risk and return while making decision, keeping in mind the ultimate goal of management i.e., to maximize
‏the wealth of its current shareholders.

‏Role of Managerial Accountant in Decision Making
‏Depending upon the company situation - size, nature and organizational set up and his own capabilities and position in the company, the managerial accountant may be required to perform various and varied functions. The importance and effectiveness of his function would also depend upon the confidence reposed in him by the top management and the functional managers. His functions generally embrace each and every activity of the
‏management which can be summarized as follows: 1. Managerial Accountant establishes, coordinates, and administers plans to facilitate the forecasting of sales, expense budgets and cost standards that will
‏permit profit planning, capital budgeting and financing.

‏2. He will formulate accounting policy and procedures. Operating data and special reports must be prepared so that the performance can be compared with plans and standards, and any variance between actual operations and pre- determined standards can be analyzed for corrective actions by management. Such comparisons between actual and expected activities should help the management in proper fixation of responsibility and also in the evaluation of
‏the various functional and divisional heads.

‏3. Managerial Accountant is responsible for the protection of the business assets to the extent possible by external controls, internal auditing, and insurance
‏coverage.

‏4. He will be responsible for tax policies and procedures and will
‏supervise and coordinate the reports required by various authorities.

‏5. Managerial Accountant must continually be aware of economic and social forces as well as the effect of governmental policies and actions on business activities. He is the principal officer incharge of the accounts of the company.

‏He shall be responsible to the Board of directors for the maintenance of adequate accounting procedures and records on the operation of the business. He shall be responsible to the president or the chairman of the board with

‏respect to the administration of his office.

‏He shall perform such other duties and functions as may from time to time be assigned to him by the president or chairman of the board or the Board
‏of directors. Thus, in his broad functional activities, the management accountant is responsible to the policy making group of top management, whereas, in his
‏administrative activities he is responsible to the top executive officer.